Andorra, tiny tax haven, tries a new balancing act

ANDORRA – Andorra, one of Europe’s smallest nations, has relied on
banking secrecy, tourism and duty-free trade to turn itself into one of the
Continent’s most impressive post war economic success stories.

Wedged between France and Spain and
with a population of 84,000, Andorra has benefited from its hybrid status as a
principality headed by representatives from its two neighbours, to attract
their entrepreneurs and tourists. It also gained a reputation for being unwilling
to share information, particularly financial data.

Still, Andorrans take pride in
having transformed their mountain farming community into a financial and
commercial centre that coupled heavy immigration from France, Spain and
Portugal with several years of double-digit economic growth.

But lately, those engines of growth
have begun to backfire, forcing landlocked Andorra to find new sources of
revenue.

“The three engines of our economy –
trade, tourism and finance – have all shown signs of exhaustion,” said Marc
Pantebre, president of the Andorran Chamber of Commerce.

Gross domestic product per capita
has dropped every year since 2006 – a decline reflected in almost every sector.
Tourism has fallen steadily over that period, down to about 9 million from 10
million annual visitors, who come mostly for the winter skiing in the Pyrenees
and a mix of duty-free shopping and hiking in the summer.

In response to the downturn, this
year, for the first time, every Andorran company will be required to publish
its accounts, thereby also allowing the government to work out the exact size
of the Andorran economy (it cannot for now provide exact GDP figures). The
state is also proposing to collect its first-ever direct taxes, in the form of
a corporate levy and to introduce a new system of value-added taxation – all
pending approval by lawmakers.

Meanwhile, the Andorran banking
sector has also been forced to reposition itself as a more competitive and
transparent financial centre.

During the worldwide financial
crisis, Nicolas Sarkozy, the French president, who also carries the title of
co-prince of Andorra, placed himself at the helm of an international crusade to
clamp down on tax evasion. Sarkozy told Andorra to fall in line if it did not
want to be ostracized, even threatening in early 2009 to drop his princely
title. Spain, desperate to plug its ballooning budget deficit, also became more
determined to recoup money hidden in offshore accounts.

Andorra complied, signing pacts
with several countries to collaborate on cross-border fraud investigations. As
a result, the Organization for Economic Cooperation and Development removed
Andorra last year from its list of “uncooperative tax havens.” Sarkozy also
applauded. “Transparency is not in conflict with the Andorran identity,” he
told a public gathering while visiting Andorra last month.

Such recent praise has come as a
major relief to Andorrans. The country’s continuing transformation is also
perhaps a test case for other smaller nations and tax havens that have been
pressured into joining the international mainstream.

But whether a better reputation as
a more transparent banking centre will also translate into a stronger nation is
unclear.

“We should have made these changes
much earlier,” said Rosa Ferrer, mayor of Andorra la Vella, the nation’s
capital.

One immediate worry for Ferrer and
others is that Andorra’s reform drive might soon run into political
instability. The centre-left government that spearheaded reform is struggling
to get lawmakers to approve its budget. Without an absolute parliamentary
majority, the governing party needs another party’s lawmakers to endorse its
budget plans. Otherwise, it would probably be forced to call early elections,
having come into office only last year.

In important steps toward joining
the international mainstream, Andorra’s latest priority has been to reach an
association agreement with the European Union, as well as to end a system of
double taxation imposed by France and Spain that has largely prevented Andorran
companies from expanding abroad.

Meanwhile, all the proposals are
testing citizens’ tolerance for change. “A lot is now being asked of people
here in terms of change, but we have our idiosyncrasy, and losing our identity
wouldn’t be good,” said the Rev. Jordi Miquel, parish priest in La Massana, an
Andorran town. “Uniformity tends to make this world poorer, and there is more
to learn from our differences.”
One concern has been Andorra’s fading appeal as a duty-free shopping paradise,
with items like electronics and alcohol traditionally available at much lower
prices than in Spain or France. But since the switch to the euro in 2002, the
price differential has dropped. Andorran shops no longer get preferential treatment
from suppliers, said Pantebre, because larger brands now use regional
distribution structures in which tiny markets like Andorra lack clout.

Still, Andorra’s planned
value-added tax, at 4.5 percent, will be far below that of almost every other
Western nation, local politicians noted. But should shopping tourism continue
to decline, it could seriously hurt a country that put business ahead of charm
as a drawing card.

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